JESSICA Edwards and Adam Sinclair already own their own home but now they want to buy a second property to rent out instead of saving for a pension.
The 26-year-old pair from Somerset earn a combined £3,000 a month from Jessica’s job as a business development consultant, and Adam work as a self-employed bricklayer.
They worked hard to buy their first home together in 2018, but because Adam is self-employed he doesn’t have a company pension scheme.
So the couple have decided they want to invest in a buy-to-let property that will eventually be a source of income in retirement for them both.
They want help cutting back on costs to save for a deposit.
But our Cash Clinic expert Holly Thomas points out that investing in property shouldn’t be seen as an alternative to a pension.
If this is something they’ve got their hearts set on, Holly tells them to start wasting money on a pricey lunches and takeaways and to switch energy providers to cut bills.
Jessica told The Sun: “We have spent a lot on our house recently, having had our whole garden redone and we recently booked a holiday to Egypt costing about £1,000.
“But our financial goal is to have enough money to put down a deposit on a rental place. We just need a steer on how to get there.
Our financial goal is to have enough money to put down a deposit on a rental place
“We want to buy somewhere that we can rely on for income, although we appreciate there are risks with gaps between tenants.”
Here’s how we save Jessica and Adam cash every month so they can start saving hard to kick-start their long-term plans.
Why we’ve launched Cash Clinic
THE Sun has launched its new Cash Clinic series because we want to help you, our readers, to save cash.
For some, it’s easy to get caught up with work and family life and to put our own finances on the back burner.
While for others, it needs an expert’s eye to work out where further cutbacks can be made to already tight budgets.
If you’d like our Cash Clinic expert to review your finances and to feature in our series, please email email@example.com
Groceries: £300 per month
New spend: £180 per month
Saving: £120 per month
The couple’s total grocery bill is £300 a month but Jessica says most of that is made-up of Adam spending cash on lunch out and takeaways.
She says she spends about £100 a month on essentials and ingredients for meals she can batch cook, such as spaghetti bolognese.
The problem is Adam doesn’t enjoy the same food and often opts for a takeaway on the way home. He also spends around £10 a day on his lunch and snacks at work.
Batch cooking is a great way to save on your food bill
Batch cooking is a great way to save money on grocery shopping but it will only benefit the household if the couple eat together.
If Adam wants to sort out his own meals he could still cut his £200 food bill to around £80 a month by making his own sandwiches and wraps at home for lunches and by introducing a few cheap, and easy to make, pasta dishes into his dinner.
We spoke to one savvy mum who spends under £10 a week on packed lunches for her three children – so Adam might want to check out her recipes and ideas.
Travel: £300 per month
New spend: £234 per month
Saving: £66 per month
Jessica spends around £100 a month on fuel driving to work and back, and on local trips. Adam spends more at £200 as he travels further for work, which could be anywhere in Somerset.
Since Adam’s place of work moves around, a regular car share arrangement isn’t possible. But he could consider car sharing with someone else at each job to save on fuel.
We can estimate he can shave a third of his bill – £66 a month – by acting on this.
Jessica’s commute is only 10-minutes by car but again, she could look into lift sharing.
There are online services that will help match her journey with others such as Liftshare.com, which is free to join. She could also try local Facebook groups and even just asking around at work.
Both Jessica and Adam should also use PetrolPrices.com to ensure they’re filling their cars up with the cheapest petrol locally.
When it comes to car insurance, Jessica and Adam pay their premiums annually from savings to cut out the surcharge for paying monthly.
They also buy insurance, as well as holidays, through TopCashback to earn cashback on top – making between £100 and £200 a year.
Jessica pays £285 a year for motor cover she found with Churchill.
Adam’s insurance cost £500 with Hastings.
The policy is up for renewal in the next couple of weeks so Adam will need to compare quotes using a comparison site, such as MoneySuperMarket, rather than accepting the automatic renewal price to make sure he’s getting a good deal.
Bills: £387.21 per month
New spend: £380.21 per month
Saving: £7 per month
Energy bills are low for the pair at £37.37 a month. They switched to a British Gas tariff – Energy Plus Boiler Cover April 2020 – in August which is beatable by an Eon tariff called Fix Online Exclusive v23, according to comparison service Energyhelpline.com.
Switching to this tariff would save them £84 a year. Though their current deal has a £60 exit penalty on it until the end of March.
Energyhelpline experts are confident that deals with prices such as the Eon tariff will still be obtainable then, so in eight weeks Jessica and Adam should switch, and save £7 a month.
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Line rental, broadband and TV channels are via BT. They had been paying £50.99 but Jessica recently contacted BT to cancel the contract and the retention team reduced the bill to £40.99 and so they stayed on.
There are much cheaper deals for broadband and line rental but Adam is rather wedded to having BT Sport. Switching to another cheaper provider and bolting on BT Sport would be more expensive.
Home insurance with SunLife at £18 a month covers building and contents, which is good value.
Their combined mobile bill is pretty steep at £95.65 a month. They both started new two-year contracts last summer with brand new handsets – one iPhone XR and a Samsung Galaxy S10 Plus – and so they are stuck with high bills until 2021.
If they leave now they’ll face hefty exit penalties.
Council tax costs £156 a month (over 12 months), water bills are £26 a month and they pay £13.20 a month for their TV licence.
Jessica and Adam have a subscription to Netflix which is paid for by Jessica’ mum.
Mortgage: £550.31 per month
New spend: £550.31 per month
The couple bought their £185,000 three bed semi-detached home in Bridgwater, Somerset in 2018. They signed up for a five-year fixed rate at 2.49 per cent with TSB.
While it’s a competitive rate for a loan-to-value of 90 per cent, at some stage they might want to look at reducing the term of the mortgage, which is currently set at 40 years.
As their careers progress and earnings climb, Jessica and Adam should choose a time when they are remortgaging to chop this, as long as they can afford the higher repayments.
A shorter term means the mortgage will get paid off faster, and they’ll pay less interest.
Entertainment: £240 per month
New spend: £240 per month
Saving: £0 per month
Adam enjoys a couple of nights out a month to the pub with friends, spending around £100.
Jessica and Adam also go out for dinner, adding another £100 a month to their entertainment bill.
Since Jessica doesn’t drink alcohol, it’s easy to keep these bills low. This is already a sensible amount to spend, and while they want to start saving, they shouldn’t have to stay in for months on end.
The couple also pay for a gym membership at £40 a month, which is fairly standard.
Clothes: £75 per month
New spend: £75 per month
Saving: £0 per month
The couple admit they rarely buy clothes and so have put their budget at £50 a month.
On top of this, they spend about £25 a month on contact lenses. They could save over the longer term by ditching these for glasses but this a personal choice.
Pet: £23 per month
New spend: £23 per month
Saving: £0 per month
Jessica and Adam adopted a four-year old dog called Thomas last month – a Patterdale crossed with a Staffy. They pay £5 a month to insure him, which is good value.
His food and treats cost around £18 a month. Jessica says she already looks for offers on the food she buys.
Debts: £549 per month
New spend: £549 per month
Saving: £0 per month
Jessica bought her brand new Mini Cooper on a finance deal last year, which costs her £270 a month. This runs until December 2021 at which point she will need to pay £7,000 or hand the car back.
Jessica is tied into this deal so is not in a position to search for another method of borrowing.
Adam paid for his secondhand BMW 3 Series M Sport with money borrowed from the bank. He took out a personal loan for £15,000 with Sainsbury’s Bank at a rate of 4.3 per cent in August.
He pays £279 a month and it runs until January 2022.
Sainsbury’s Bank offers a typical interest rate of 2.9 per cent – but following a credit check, Adam was offered a higher rate – possibly because of his self-employed status being deemed a higher risk.
It is possible to do a “soft search” to see what loan rate you could be eligible for on several websites, including MoneySavingExpert.
This is a more tailored search than just looking at the best buy rates.
If Adam finds he is eligible for a more competitive rate elsewhere he’ll need to pay a penalty of 58-days interest to switch. He would need to do the sums to make sure switching would save him money.
Jessica has an American Express credit card with £2,000 worth of debt on it. She took out the 0 per cent purchase card in 2018 to use for furnishing the new house.
It ended up with a balance of £5,000 and Jessica has paid ad hoc amounts to bring it down, sometimes only paying the minimum payment of £25.
The 0 per cent period expires next month, so she plans to use her savings to clear the £2,000 at the end of January.
Savings: £200 per month
New spend: £200 per month
Saving: No saving, but they can boost their interest
The couple save £200 into a Santander Regular eSaver account – a 12 month savings account paying 2.5 per cent.
While they are getting a decent rate, they are already paying in the maximum monthly amount so should look to open another account where they can save more.
Jessica has £8,000 of savings, which will soon be £6,000 when she repays the American Express card at the end of this month.
The couple should switch savings provider to earn more interest
She confesses that it’s sitting in her current account – a NatWest Select current account which doesn’t pay any interest on credit balances.
Adam too has savings of around £1,500, again, sitting in his current account earning 0 per cent.
They should open a savings account where they can earn interest on their savings.
Since it’s money they don’t need to access in theory, before they have enough deposit for the rental home, they can get up to 1.56 per cent for fixing for six months at BLME and up to 1.6 per cent for fixing for nine months at Aldermore through Active Savings.
By fixing for longer they can get even better rates – BLME is paying 1.9 per cent on a two-year account.
What has Cash Clinic managed to save Jessica and Adam?
The couple’s finances are pretty streamlined – so hats off to them. Jessica says she takes the lead on the household finances, making sure they don’t pay over the odds for bills and purchases.
She has been very thorough with her own finances and the joint outgoings.
But Cash Clinic has still managed to save the couple £2,316 a year.
Most of this is if Adam starts taking lunch to work every day – saving around £1,440 a year – and by exploring a car share with each job he might be able to save on petrol.
What has Cash Clinic saved Jessica and Adam?
HERE’S how much our Cash Clinic has saved Jessica and Adam:
- Groceries: £120 a month/ £1,440 a year
- Travel: £66 a month/ £792 a year
- Bills: £7 a month/ £84 a year
Total saving: £193 a month/ £2,316 a year
They have a decent amount of disposable income to put away each month, even without the small savings we found them, and a healthy savings balance to act as a financial cushion.
Yet if they want to save hard for a deposit, they will need also need to stop spending on holidays and on improving their own home and plough every penny into a deposit fund.
Buy-to-let mortgages require at least 25 per cent as a deposit.
A two-bed terraced house in their own neighbourhood (where they are considering) for £165,000 would require a £41,250 deposit.
Alternatively, they could look at a two bed apartment for sale near the docks and Bridgwater’s centre for £100,000, with a more affordable deposit of £25,000.
However, it’s still a long way from Jessica and Adam’s combined savings of £7,500 (Jessica’s £6,000 and Adam’s £1,500).
Jessica and Adam should note the other costs – and potential pitfalls – to becoming a landlord
They should note the other costs – and potential pitfalls – to becoming a landlord before they make up their minds.
There’s the 3 per cent surcharge on stamp duty charged on additional property bought by any homeowner.
If Jessica and Adam bought the two bed terrace at £165,000, it would cost them £5,750 in stamp duty (an eye-watering £48,750 with the deposit).
Even the cheaper property at £100,000 would attract a tax of £3,000 (totalling £28,000).
There are maintenance costs to consider too, as well as void periods in between tenancies, and tax changes that from April mean landlords can pocket less profit.
Landlords can currently deduct mortgage interest payments from their rental income when calculating their tax liability.
But from April 2020, landlords will have to pay income tax on the entire rental income. Being a landlord can also be very time consuming.
Of course there are benefits too, such as a regular income as well as owning an asset which is (hopefully) appreciating in value.
They should consider alternatives where they can put their money to work straight away – saving the deposit and stamp duty could take the best part of ten years.
Instead, Adam could start paying into a pension now to fund retirement.
The tax breaks in pensions are unrivalled. Savers get a tax top-up at the rate that they pay income tax – in Adam’s case, the basic rate at 20 per cent.
So, every £80 paid in, for example, will automatically turn into £100.
If Adam starts paying £100 a month into a pension at age 26, with a 5 per cent growth rate each year his pension could be worth £133,980 by the time he reaches 60, according to calculations by AJ Bell.
If he could stretch to £200 the pot would be worth £267,961.
Adam should also boost his “rainy day” account of £1,500 as a financial buffer – especially important for those who are self-employed.
Jessica already has a substantial rainy day savings account with £6,000 in, which means she is in a position to look at some longer-term investment options for her savings going forward.
She might consider investing some money in the stock market in a Stocks and Shares Isa, a long as she’s comfortable with the risks.
If they want some professional advice about the best move for their circumstances, they should see an independent financial adviser who can help them.
Jessica said: “I’m really pleased to hear that I’ve been doing the right things with our finances in terms of making sure we don’t pay more than we need on bills. My mum has always been savvy so I think some of it has rubbed off.
“Cash Clinic has made us think about the potential barriers and pitfalls of becoming a landlord. We didn’t realise what it would take to actually buy a place as a rental.
“We will definitely investigate starting a pension. I’ve been a bit nervous to invest in the stock market as my mum lost a lot of money years ago. It’s something I will look into though.”